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Test of Random Walk Hypothesis of the Daily Sensex Return

International Journal of Financial Management

Volume 2 Issue 2

Published: 2012
Author(s) Name: Som Sankar Sen
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Abstract

The present study investigates whether the Indian Stock Market represented by BSE SENSEX is efficient or not. An attempt has also been made to test the assumption of independent and identically distributed (i.i.d) in respect to market returns in terms of daily SENSEX return data, which is the most restrictive version of the random walk hypothesis. The result of unit root test shows that the daily SENSEX returns are random. Moreover, to capture the possible non-linearity in the time series data TARCH(1,1) model has been fitted. Furthermore, BDS test has been applied to Standardized residuals of the above estimated model to check whether they are i.i.d. or not. The estimated result of the said test clearly indicates that null hypothesis of i.i.d. could not be rejected. Hence, it could be concluded that daily SENSEX returns follow Random Walk Model-I as described by Campbell et al (1997) and in general Indian Stock Market is efficient in its weak form during the study period. Keywords: SENSEX, Random Walk Model-I, TARCH(1,1), BDS test..

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